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Melbourne house prices tipped to dive, while Sydney's climb then plateau

| 13.07,15. 04:24 AM |

Melbourne house prices tipped to dive, while Sydney's climb then plateau

Melbourne house prices are set to fall 9 per cent, while Sydney prices continue to climb and then hold their value, analysis has found.

The paper under review for the Economic Record found Sydney prices would "continue to rise till the end of 2015 then start plateauing with no anticipated sharp falls".

Melbourne prices will begin falling almost immediately, sliding 9.2 per cent in the year ahead, while Sydney's will be up 6 per cent over the year. Brisbane's prices will fall 8.1 per cent and Perth's 5.2 per cent, according to the analysis, while those in Adelaide, Hobart and Canberra will continue to climb slowly.

Abbas Valadkhani of Swinburne University, Ronald Ratti from the University of Western Sydney and Greg Costello from Curtin University analysed monthly house price data going back to 1995.

Fitting patterns to the data for each city until December 2014, they predicted where prices would be by May 2015 and found the results accurate using four different statistical tests. Then they extended the results 12 months using the data to May 2015.

"This doesn't predict every seesaw movement," Dr Valadkhani said. "It only predicts the general direction of prices. If it could predict exact movements we would be multimillionaires and wouldn't need to work in academia. The actual prices could be a little bit above or a little bit below the trend we are predicting."

The average Melbourne house price climbed 7.6 per cent in the 12 months to April, hitting an all-time high of $750,130 before slipping 1.6 per cent to $737,870.

The average Sydney price climbed 15.5 per cent to a record high of $951,960, before slipping 0.2 per cent to $949,800.

"If another two or three months pass and the prices turn back up and grow strongly, in one sense our model will have been defeated," Dr Valadkhani said. "But if they continue to behave consistently with what our model predicts, we can add in extra information each month and improve the performance of the model even further."

The authors believe their model is the first to be easily updatable each month, providing advance notice of turning points.

At this stage it covers only the prices of freestanding houses. Further refinements could extend it to apartments and to prices in specific suburbs.

Dr Valadkhani said: "If we are right about the coming price adjustment, even if it is not a bubble, it will be very costly for many families that have borrowed and put their lifetime savings into one particular house.

"If they can get an idea of what is likely to happen, even just a few months ahead, they can avoid mistakes."

Asked why Sydney house prices would keep climbing and then plateau while Melbourne prices fell, Dr Valadkhani said the model didn't give reasons. However, its predictions are consistent with a continuing shortage of land and apartments in Sydney and an oversupply of apartments in Melbourne.

Preliminary Reserve Bank research unveiled last week found that even at the current high prices, purchase prices were undervalued by 30 per cent relative to the cost of renting, suggesting prices had further to climb.